Risky Business: Can Insurance Mitigate All Your Risk?

All of the feature articles in the September issue of the Contra Costa Lawyer relate to the fact pattern for this issue. Read it here. 

There is an old adage, “In order to find out what your policy covers, you must first find out what it doesn’t cover.”

Insurance carriers have a duty to defend their clients in cases that are brought against them for any particular reason as long as the claim isn’t specifically excluded from coverage.

As the business owner, Family Co is responsible for providing a work environment that is free from harassment and dangerous conditions, it is incumbent upon them to be able to financially mitigate each potential claim. The financial instrument in this case would be an insurance policy.

In general, risk mitigation is a “pre-incident” or “pre-claim” consideration. Properly identifying all the potential risk factors of a business is essential to understanding the total risk profile.

Scenario Recommendations

This scenario has several circumstances from a risk management/insurance perspective that are obviously concerning: this attack happening on company premises, company time and perpetrated by a company vendor known to company management to be harassing company employees.

The most important part of risk management /mitigation is to control the things you can control to reduce your potential exposure.

Obviously, Family Co. cannot control what doesn’t happen on company property, but they are fully responsible for everything that happens ON company time and property. There are also circumstances/risks that occurred on company property and time that are also not in the control of the company, these are known as operational risks. Knowing this, it is imperative to properly train managers and supervisors in risk management. All employers in California are required to have an Injury and Illness Prevention Program (IIPP).

Assumptions

For this scenario, we are assuming that the company is carrying Workers’ Compensation insurance and General Liability Insurance.
Many small business owners aren’t always fully aware of the spectrum of different policies that cover dissimilar risks and unfortunately usually learn the hard way about policy limits and exclusions. Employment Practices Liability Insurance (EPLI) is all too often either not a consideration or not an expense the company would be willing to pay for.

Workers’ Compensation Insurance Policy

Workers’ Compensation insurance is one of only two insurance policies required by law, the other being Auto Liability. Not carrying a Workers’ Compensation (WC) policy is a criminal offense, with significant penalties for the business owner.

The fact that this attack happened in the company parking lot on company time most likely qualifies the injuries to be covered by Worker’s Compensation (for more in-depth legal analysis on the applicability of WC, see Elaine Dean’s article). WC provides five basic benefits: medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits, and death benefits.

The part of WC that many businesses do not know about or understand is Employers Liability. Part II of a WC policy is an endorsement called: Employers’ Liability (EL) with a $1 million limit. Basically, EL is intended to protect the employer from legal liability arising out of an employee injury.

Within a WC claim, legal liability is a separate issue from the actual benefits paid for an injury. EL is liability protection if the employer were accused of somehow being responsible, fully or in part, for an employee injury. Several examples of claims that would be covered are: Third Party Over Actions and “Dual Capacity” suits relating to injured employees.

In this case, the injuries and medical cost would be covered by WC. If Veronica chooses to sue Family Co. for her injuries, EL coverage would be a key coverage in protecting Family Co.

Employment Practices Liability Insurance (EPLI)

Another policy that would provide coverage for a potential claim against Family Co. would be known as an Employment Practices Liability Insurance Policy, or EPLI. EPLI policies provide specific coverages to employers against claims made by employees for several categories including: sexual or workplace harassment, discrimination, wrongful termination, invasion of privacy, breach of contract, wrongful demotion, humiliation and several others.

Properly mitigating these potential operational risks requires having a policy in place prior to the occurrence/claim. Experience has shown that an EPLI policy is highly recommend when a company grows past 20 full-time employees, yet many companies with 50 or fewer employees choose not to carry it. At 20 employees, spans of control are typically stretched and the owner isn’t involved in every aspect of the business and begins to rely on managers or supervisors. Once that happens, control/mitigation of the operational risk facing the business begins to be dispersed to those mid-level managers, yet the responsibility remains with the business owner.

Properly training mid-level managers and supervisors is crucial to maintaining a lower risk profile.

If Family Co. had an EPLI policy in place PRIOR to the date of the injury/claim (depending on the type of EPLI policy, occurrence or claims made), there would be coverage in case Veronica decided to file a suit for hostile work environment, infliction of emotional distress or sexual harassment.

Conclusion

Many businesses that have grown rapidly or have been in the family for a substantial amount of time and are looking to transition, really need to have a total risk evaluation. Oftentimes, business owners feel that if they didn’t need an insurance product in the past, they don’t need it moving forward.

Not all risks facing a business can be mitigated with an insurance policy, but most operational risk can be managed with the right combination of total risk management and insurance policies. These two things go hand in hand. If a business chooses to “self-insure” for a specific risk like sexual harassment, the company’s bottom line will take the hit for any judgement rendered against them.